2016 RETAIL INDUSTRY Year In Review Published in January 2017 TABLE OF CONTENTS BANKRUPTCY IN THE RETAIL SECTOR 2 RECENT M&A ACTIVITY IN THE RETAIL SECTOR 4 SHAREHOLDER ACTIVISM IN 2016 5 PROP 65 AMENDMENTS AFFECTING RETAIL 7 INCREASE IN FALSE ADVERTISING LABELING SUITS AGAINST CONSUMER AND OTHER PRODUCT MAKERS 10 SEC ENFORCEMENT ACTIONS OF NOTE FOR RETAILERS 12 RETAILERS SHOULD PREPARE FOR A HODGE-PODGE OF EQUAL PAY LAWS 14 INSURANCE COVERAGE FOR CYBER EXPOSURES AND PRODUCT RECALLS MADE HEADLINES FOR RETAILERS IN 2016 17 RETAILERS AND CPG COMPANIES RAMP UP VENTURE CAPITAL INVESTING 20 3D PRINTING IN THE GIG-ECONOMY: LITIGATION RISKS 22 “ NATURAL” FOOD LABELING: COURTS DEFER TO THE FDA TO INITIALLY SHAPE THE LAW 25 IS JOINT EMPLOYER STILL A CONCERN FOR RETAILERS? IN A WORD…YES 27 RETAIL INFORMATION TECHNOLOGY AND INNOVATION 28 ANTITRUST MERGER ENFORCEMENT IN THE RETAIL SECTOR 32 REGULATORY RISKS IN THE PRIVACY AND DATA SECURITY ARENA CONTINUED TO EVOLVE IN 2016 36 DEAR CLIENTS AND FRIENDS, As our 2016 Retail Industry Year in Review demonstrates, we are working in exciting and turbulent times for the retail industry. After a lag during the first half of the year, merger and acquisition activity has taken off. Venture-capital investments in the retail sector are at a near- record pace, and after the 2016 US election, the new administration is expected to focus on job growth, which will squarely impact the retail industry. Shareholder activists are shifting their attention to small and mid-cap companies, and retail companies are particularly subject to such activism because of their dependence on the support and impressions of “Main Street” consumers. The US Securities and Exchange Commission (SEC) has filed a record number of enforcement actions. And cybersecurity and data privacy remain a top concern for customers, regulators and law-enforcement officials. Over the past year, Hunton & Williams LLP’s retail team continued to achieve demonstrable successes for our clients. Among other engagements, we have been particularly busy representing global and national retail clients in labor and employment matters, mergers and acquisitions, restructurings and bankruptcies, and in antitrust and consumer-protection investigations before the Department of Justice (DOJ), the SEC and the Federal Trade Commission (FTC). We were also pleased to be recognized by Chambers USA as one of the top retail groups nationwide. I hope that you will find our 2016 Retail Industry Year in Review a helpful guide to the unique challenges and developments that faced the retail industry this past year, and to projections for the months ahead. As you look ahead to 2017, I am certain that you will benefit from my colleagues’ reports and analyses in the pages that follow. Wally Martinez Managing Partner 2016 Retail Industry Year in Review BANKRUPTCY IN THE RETAIL SECTOR J.R. Smith, Justin Paget and Nathan Kramer J.R. is a partner and Justin and Nathan are associates in the bankruptcy, restructuring and creditors’ rights practice in Hunton & Williams’ Richmond office. Despite slow but steady overall economic expansion, 2016 Large Retail Bankruptcy Case Overviews shuttering stores and bankruptcy filings remained a Sports Authority: In March, with assets of $1.3 billion common occurrence for many large retailers in 2016. and liabilities of $1.1 billion, this sporting goods giant In the past year, companies including Sports Authority, filed for Chapter 11 protection, initially planning to close Aéropostale, Pacific Sunwear of California (PacSun), approximately 140 of its 450 stores and reorganize Fairway Group Holdings, Golfsmith International operations. Ultimately, however, Sports Authority Holdings Inc., Vestis Retail Group, Inc. (the operator decided against pursuing a reorganization after of Sports Chalet, Eastern Mountain Sports and Bob’s encountering problems related to securing financing Stores) and American Apparel sought Chapter 11 relief. and restructuring debt; instead closing all of its stores These filings come on the heels of the slew of 2015 and liquidating its assets. bankruptcies in the industry that included RadioShack, Quicksilver, American Apparel (having now filed again Vestis Retail Group, Inc.: In April, following on the in 2016) and Wet Seal. Rumors continue to swirl heels of Sports Authority and its going-out-of-business regarding potential additional filings of household retail sales, this operator of sporting goods stores Eastern names in 2017. Mountain Sports and Sport Chalet, and clothing store Bob’s Stores, teetered into bankruptcy, seeking to Many of these companies have encountered close all 56 of its stores and ceasing all online sales. difficulties stemming from industrywide shifts in In June, the companies’ assets were sold to an affiliate consumer preferences away from traditional brick- through a private sale. The purchaser is currently in and-mortar retailers toward online sellers. Traditional the process of obtaining bankruptcy court approval of a retailers often face higher occupancy costs and liquidation plan. employee-related expenses than online retailers. “Overstoring,” a problem that occurs when a retailer PacSun: Also in April, this clothing retailer entered has too many physical locations or locations that Chapter 11 bankruptcy with nearly 600 stores, after are too large, is echoed by many of these brands. closing hundreds of stores in the months leading up Bankruptcy offers retailers the unique opportunity to to filing and reversing a failed expansion strategy. rework struggling business models, reject burdensome Marking one of the true success stories of 2016, leases and close stores to reduce their physical PacSun was able to successfully reorganize by footprint. Bankruptcy also offers retailers a breathing restructuring the debt with its senior lender and spell to negotiate with creditors to reduce debt reorganizing operations, while closing only a small burdens, often in exchange for an equity stake in the percentage of stores in bankruptcy. business. As demonstrated by the following overviews of the largest 2016 retail filings, most retailers have not successfully reorganized under Chapter 11. Hunton & Williams LLP | 2 Aéropostale: In May, this teen clothing retailer filed for Chapter 11 protection, seeking to immediately close 154 of its over 800 stores located throughout the United States and Canada. In September, a consortium of buyers led by mall operators won an auction for Aéropostale’s assets, buying the retailer for approximately $243.3 million, plus the assumption of debt. The purchasers have indicated they intend to keep at least 229 Aéropostale locations open. Golfsmith International Holdings Inc.: In September, the world’s largest golf retailer filed for Chapter 11 bankruptcy, citing the ebb of popularity of the sport. The bankruptcy of the Austin-based retailer comes on the heels of Nike’s announcement that it will exit the golf equipment business. At an October auction of the business, the company announced that Dick’s Sporting Goods — operator of Golf Galaxy-branded stores — won the bidding for the right to purchase all inventory and intellectual property and will continue operating at least 30 stores. The remainder of the retailer’s 109 locations will be liquidated through a high risk of filing for bankruptcy within the next two consortium of liquidators. years. Unsurprisingly, these at-risk companies are also primarily brick-and-mortar retailers and include several In November, facing a reportedly American Apparel: national chains. Outside of bankruptcy, many of the rocky relationship with its founder, teen retailer country’s largest and best known retailers also chose American Apparel re-entered Chapter 11 following an to close some of their underperforming stores in 2016. emergence from its 2015 bankruptcy in February 2016. The so-called “Chapter 22” filing comes as the retailer Conversely, online retailers have continued to reported years of losses and rising online competition. gain market share, with the number of consumers Canadian apparel maker Gildan Activewear has browsing and buying products online projected to reportedly agreed to serve as the “stalking horse” reach $270 million by 2020. As this industry trend bidder for the intellectual property rights related to the continues, traditional retailers may continue to seek brand and certain other assets for about $66 million bankruptcy protection over the next several years to in cash. Gildan will not be purchasing any retail store take advantage of the unique opportunity it provides assets. In late 2016, American Apparel announced it is retailers to overhaul obsolete business models to better seeking to close nine stores by 2017, including stores coincide with shifting consumer trends and right-size in New York City and Washington, DC. their balance sheets. Future Bankruptcy Outlook The trend of bankruptcy filings likely will continue into 2017 and beyond, as a Fitch Ratings report published in 2016 indicates that seven major retailers have a Hunton & Williams LLP | 3 2016 Retail Industry Year in Review RECENT M&A ACTIVITY IN THE RETAIL SECTOR Scott Kimpel and Page Hubben Scott, who formerly served on the Executive Staff of the SEC as Counsel to Commissioner Troy A. Paredes, is a partner in the corporate finance and mergers and acquisitions practice in Hunton & Williams’ Washington office. Page is an associate in the corporate finance and mergers and acquisitions practice in the Washington office. Although M&A activity was slow in